Britain is leaving the EU. That’s the news that the whole world woke up to today, and the question everyone is asking now is, what's next?
The truth is that no-one quite knows. Britain’s political and economic establishments need to dust themselves off and work out a way forward for Britain as an independent nation with fresh leadership. Laws and trade agreements that we benefitted from as a member of the EU will be rewritten and renegotiated as Britain prepares to leave. What we do already know is, this complex and potentially lengthy process will, in the short term, create some uncertainty in the markets, although the extent of this impact remains to be seen.
The good news for Wealthify customers is that we had positioned Plans cautiously ahead of today, with this very outcome in mind. We have significant holdings in Cash Equivalents and Cash across the board, which will remain largely protected from market movements. The exact positions will range depending on your individual investment style, but are as high as 40% in our most cautious Plans.
Holding cash will be crucially important in the coming weeks as we take advantage of the market downturn by buying bargain-price investments. As improbable as it seems, now could be one of the best times to add money to investments, in order to take advantage of short-term market conditions and boost your potential future returns.
While the longer-term effect of the ‘Brexit’ decision may well be positive for Britain, for now individuals, businesses and investors, uncertain of the future, are likely to take measures to protect themselves by halting certain activities, delaying decisions, and in the case of foreign investors, pause or slow some inward investment to the UK. The speed at which the UK government moves to get a solid framework in place for a stable and prosperous post-Brexit Britain will therefore be critical to the rapidity and extent of a market recovery.
In the meantime, we think the best thing investors can do is stay calm, drown out the current noise and ignore any short-term turbulence, since, as all good investors know, investing is a long-term strategy. But don't just take their word for it: the long-running Barclays Equity Gilt Study*, a 114 year study of equity market performance, shows that the probability of your shares outperforming cash savings is 90% if you hold them for ten years, rising to 99% if you stay put for 18 years. This should provide at least some reassurance to investors nervously watching today’s post-Brexit markets, as will the truth that with the exception of those that have been eradicated through war or revolution, stock markets have recovered from every single downturn in history, often quite rapidly.
So, whatever the short-term effect Brexit has on financial markets in the coming weeks, with the benefit of hindsight it’s likely to look more like a blip than a trend, particularly to those long-term investors who hold their nerve.
Please remember that the value of your investments can go down as well as up and you can get back less than invested.
*Barclays Equity Gilt Study 2016 http://hungrydummy.com/media/pdf/EquityGiltStudy2016.pdf